Understanding the Impact of Online Gambling

When New Jersey Governor Chris Christie Signed Legislation approving the legalization of online gambling, he said he was looking to help the struggling Casino industry, but it could also be a game-changer for Zynga, other social game companies, and the technology providers that offer the infrastructure to manage gambling. New Jersey is the third state to approve online gambling, and there are many steps—and perhaps even years—before this business takes off, but as such a populous stake, it's a key step in tipping this business to the mainstream.

Zynga shares added nearly five percent the session Christie signed the legislation, after jumping on Friday, after Nevada approved online gambling. While Zynga struggles to grow the number of people who pay to play its free games, and pushes to grow the amount that small percentage of people are paying, real-money gaming would provide a much-needed new revenue stream. Over 30 million people play Zynga's poker game on Facebook alone every month. So if even a small percent of those people are convinced to gamble with cash, that would provide a much needed boost to Zynga's bottom line.

Earlier this week at a Morgan Stanley conference CEO Mark Pincus said he wasn't interested in going after a hard-core gambler audience, but rather is looking to bring the gambling experience to the masses.

With Zynga's stock off more than 70 percent in the past year, amid ongoing layoffs and restructuring, the company is slowly pushing forward with plans to launch online gambling. But the push is indeed slow. Pincus says it could be a year or more before its application for an operator license in Nevada is approved.

"I don't believe that Zynga's going to come to dominate the world of online real money gambling," said Needham and Company analyst Sean McGowan. "But they would be an attractive licensing partner or even acquisition target for the casino giants."

And Zynga isn't alone: A number of private gaming studios will also benefit from the new opportunity—like SGN, run by MySpace co-founder Chris DeWolfe, and Big Fish Studios. Both have launched online gambling overseas.

And then there are the technology companies that provide the infrastructure for these mobile and social gaming companies. A company called Betable provides the platform for any developer to offer gambling on their apps (overseas only at this point) without getting separate approvals. This allows developers here in the US to get into the online gambling business, without dealing with the complicated regulation. And most of Betables clients, including SGN and Big Fish, are based in the US.

"It's very encouraging to see," said Betable CEO Chris Griffin. "When an industry like this is shifting and regulations are changing it'll likely take a long time for it to be an interesting business prospect. But these are very encouraging first steps in that direction. We're especially encouraged by what we're seeing in New Jersey. Nevada's plan right now only allows for online poker, which requires a lot of liquidity and you need a lot of people playing together for it to work. New Jersersy is allowing a much broader array of games to be played online-- all the games on the casino floor."